Tips For Purchasing Short Sale Properties From Banks
When shopping for a home, you may notice that certain listings are labeled as short sales, short pays or pre-foreclosures. All of these terms mean the same thing: the seller is upside-down on his or her mortgage and is attempting to negotiate a deal with the lender in the hope of avoiding foreclosure. In this type of sale, the bank (lender) agrees to accept less than the amount owed on the mortgage. The transaction benefits the bank by allowing it to avoid repossessing the home in foreclosure, which is expensive and time-consuming, and it benefits the seller by allowing him or her to avoid the negative credit ramifications of foreclosure and the bankruptcy that sometimes accompanies it. If you're interested in buying a property that's listed as a short sale, here's what you need to know.
How It Works
Unlike in a foreclosure, the bank does not own the property in a short sale. However, because the bank must approve the sale, it will seem like the buyer is purchasing the property from the bank. Short sale transactions, however, can be much more time-consuming than foreclosure transactions. In some ways, buying a short-sale property is just like a traditional purchase. However, there are a couple of ways in which the purchase agreement you and your agent draw up are different. The contract will specify that the terms are subject to the mortgage lender's approval. In a normal purchase/sale transaction, the only party who would need to approve the sale is the seller. The contract should also state that the property is being purchased "as-is". While it is acceptable to include language in the contract that allows you to back out of the deal if an inspection reveals considerable problems, in general, you should not expect the bank to lower the price to account for repairs if any problems are revealed. The bank is also unlikely to make any repairs, and the seller, being strapped for cash, is probably even less likely to help out with any potential repairs.
A Waiting Game
When you make an offer on a short sale property, be prepared to wait. Banks are notorious for taking as long as several months to respond to short sale offers. Some experts recommend that you give the lender a deadline to reduce the wait time. It's hard to say whether this strategy will really spur the bank to action, but it may be worth it from your perspective if you can't handle the stress of waiting months for a response. However, if the bank hasn't actually approved the short sale yet at the time of your offer, implementing a deadline will be useless as it may take several months just for the seller to reach a short sale agreement with the lender. And even if such an agreement is struck, there is no guarantee that the short sale will go through.
Weighing the Pros and Cons
Experts disagree on whether short sales are a good deal for buyers. Some say that short sales are priced below market values, creating the opportunity for buyers to get a great deal or for first-time homebuyers to get into a home when they otherwise might not be able to afford one. Others say that banks have no interest in selling properties below market value and will do a comparable market analysis before setting or accepting a price for a short sale. Further, the listing price of a short sale may be an amount the seller's agent thinks the bank might accept rather than the amount the bank has actually agreed to accept. The bank might find the price too low, or the seller might list the property below market with the intention of generating a bidding war.
Keep the Search Going
Given how long it will probably take the bank to reply to your offer, you should probably keep looking at other houses while you wait for a response, and you should probably proceed with the purchase of another property if you find an easier buy. Have your agent write the short sale purchase agreement in such a way that you'll retain this flexibility. And if you're buying on a deadline, don't even bother with a short sale.
Haggling Over Prices
Be prepared to raise your offering price. For the seller to increase the odds of the bank going through with the short sale, he or she may try to convince you to up your purchase price. Ultimately, though, the seller has no real authority to approve the selling price. The bank may also counteroffer as it tries to cut its losses.
Bottom Line
Potential buyers of short-sale properties should proceed with a hefty dose of caution and a pound of patience. Even with a thorough understanding of the process, the best agent in the world and a willingness to wait, the bank will not always cooperate. However, short sales can be a good deal for some buyers and will occasionally close successfully.
When shopping for a home, you may notice that certain listings are labeled as short sales, short pays or pre-foreclosures. All of these terms mean the same thing: the seller is upside-down on his or her mortgage and is attempting to negotiate a deal with the lender in the hope of avoiding foreclosure. In this type of sale, the bank (lender) agrees to accept less than the amount owed on the mortgage. The transaction benefits the bank by allowing it to avoid repossessing the home in foreclosure, which is expensive and time-consuming, and it benefits the seller by allowing him or her to avoid the negative credit ramifications of foreclosure and the bankruptcy that sometimes accompanies it. If you're interested in buying a property that's listed as a short sale, here's what you need to know.
How It Works
Unlike in a foreclosure, the bank does not own the property in a short sale. However, because the bank must approve the sale, it will seem like the buyer is purchasing the property from the bank. Short sale transactions, however, can be much more time-consuming than foreclosure transactions. In some ways, buying a short-sale property is just like a traditional purchase. However, there are a couple of ways in which the purchase agreement you and your agent draw up are different. The contract will specify that the terms are subject to the mortgage lender's approval. In a normal purchase/sale transaction, the only party who would need to approve the sale is the seller. The contract should also state that the property is being purchased "as-is". While it is acceptable to include language in the contract that allows you to back out of the deal if an inspection reveals considerable problems, in general, you should not expect the bank to lower the price to account for repairs if any problems are revealed. The bank is also unlikely to make any repairs, and the seller, being strapped for cash, is probably even less likely to help out with any potential repairs.
A Waiting Game
When you make an offer on a short sale property, be prepared to wait. Banks are notorious for taking as long as several months to respond to short sale offers. Some experts recommend that you give the lender a deadline to reduce the wait time. It's hard to say whether this strategy will really spur the bank to action, but it may be worth it from your perspective if you can't handle the stress of waiting months for a response. However, if the bank hasn't actually approved the short sale yet at the time of your offer, implementing a deadline will be useless as it may take several months just for the seller to reach a short sale agreement with the lender. And even if such an agreement is struck, there is no guarantee that the short sale will go through.
Weighing the Pros and Cons
Experts disagree on whether short sales are a good deal for buyers. Some say that short sales are priced below market values, creating the opportunity for buyers to get a great deal or for first-time homebuyers to get into a home when they otherwise might not be able to afford one. Others say that banks have no interest in selling properties below market value and will do a comparable market analysis before setting or accepting a price for a short sale. Further, the listing price of a short sale may be an amount the seller's agent thinks the bank might accept rather than the amount the bank has actually agreed to accept. The bank might find the price too low, or the seller might list the property below market with the intention of generating a bidding war.
Keep the Search Going
Given how long it will probably take the bank to reply to your offer, you should probably keep looking at other houses while you wait for a response, and you should probably proceed with the purchase of another property if you find an easier buy. Have your agent write the short sale purchase agreement in such a way that you'll retain this flexibility. And if you're buying on a deadline, don't even bother with a short sale.
Haggling Over Prices
Be prepared to raise your offering price. For the seller to increase the odds of the bank going through with the short sale, he or she may try to convince you to up your purchase price. Ultimately, though, the seller has no real authority to approve the selling price. The bank may also counteroffer as it tries to cut its losses.
Bottom Line
Potential buyers of short-sale properties should proceed with a hefty dose of caution and a pound of patience. Even with a thorough understanding of the process, the best agent in the world and a willingness to wait, the bank will not always cooperate. However, short sales can be a good deal for some buyers and will occasionally close successfully.